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Remarks by William A. Downe, President and Chief Executive Officer, BMO Financial Group at the Scotia Capital Conference

Toronto, ON, September 16, 2009

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Slide 1

Thank you, Kevin, for your introduction, and for the opportunity to be here again this year.

Good morning to all of you. It’s a pleasure to be back at the Scotia Capital conference, which every September signals the business year is under way.

Slide 2 – Forward Looking Statements & Other

Before I begin, as noted, my comments may include forward-looking statements.

Slide 3 – Today’s Agenda

I’d like to talk about three things today. First, the change that’s been under way at our company over the last 36 months and what we’ve accomplished during that time. Second, some context with regard to the North American regulatory environment. And third, where we’re headed and why we’re well positioned to get there.

Slide 4 – Strong Operating Momentum and Earning Power

As you know, BMO recently reported good third quarter financial results. Our net income for the quarter was $557 million, with an ROE of 12.1%. These results reflect a normalization process underway – both in the economy and the financial markets. North American markets are not yet out of the woods and there is a long way to go, but we’re encouraged that a recovery has begun.

Looking at year-to-date numbers – and adjusting for notable items – revenue growth was 9.4% with operating leverage of 1.3%, which reflects continued investment in our businesses.

In the nine months, pre-provision, pre-tax earnings were $2.6 billion – as reported but excluding severance costs recorded in Q2 – and that was 12% above last year. These results provide an insight into the strong operating momentum and earning power of BMO. We’re well positioned to compete very successfully in a new operating environment that is emerging for banking and investing, and which I’ll get to shortly.

Our results reflect the re-orienting of our businesses through a systematic, multi-year effort aimed at strengthening our brand, customer loyalty, competitiveness and core business performance.

Slide 5 – Strong Operating Group Performance

Let me take a few moments to provide some group highlights that underline these achievements.

P&C Canada has posted excellent results for four consecutive quarters. This strength reflects the tangible success of our focus on improving our customers’ experience across their entire relationship with us. This includes the work we’re doing operationally and culturally to deliver against the market position reflected in our advertising. We’re demonstrating solid momentum across all business segments – personal, commercial and cards – and we’re keeping our foot on the accelerator.

For those of you attending our P&C Canada Investor Day tomorrow, you’ll be spending some time with Frank Techar and the leadership team as they describe in detail this important part of our company.

In the United States, our P&C bank is competing well in a challenging environment. Harris has continued to pursue new business in the marketplace at a time when others have receded or fallen away completely. We’ve increased our visibility with expanded advertising and promotion. We’ve grown deposits and significantly increased mortgage originations.

And the latest J.D. Power rankings show Harris in a number one position for customer satisfaction in Midwest retail banking.

Our Retail Net Promoter Score remains strong and consistent, at a time when many competitors’ scores have deteriorated. We intend to expand our share of the deposit and loan market in Chicago and in adjacent urban cities including Indianapolis and Milwaukee.

Slide 6 – Strong Operating Group Performance

Our Private Client Group is performing well in all of our traditional wealth management businesses – full service brokerage, mutual funds and private banking. And now, our recent insurance acquisition has created another strong pillar for this group. In fact, the strength of the BMO brand has been complementary to the insurance business – particularly in providing new momentum in the universe of Managing General Agents.

BMO Capital Markets is delivering strong financial results this year. We’re benefiting from revenue opportunities across a number of our trading businesses arising from client flows, a favourable interest rate environment and narrowing credit spreads.

In the longer-term, we have confidence that our diversified business mix and client-centered strategy will continue to generate high quality earnings, with an improving return on equity.

Importantly, in all four business groups at BMO, the improvements we’ve made in customer service have not come at the expense of operating leverage. We’ve worked hard to simplify our organizational structure, ensuring that our spending is targeted at customer-facing initiatives, and we are starting to see the benefits.

Slide 7 – Consistent Discipline in Credit Risk Management

A quick comment on credit losses: As I said on the Q3 call, we take a methodical, loan-by-loan approach to valuing our portfolio and we’re comfortable with where we stand.

We expect provisions to remain elevated into 2010. However, negative migration is moderating and we’re confident that the strength of our core business earnings will absorb our credit losses through the cycle.

Slide 8 – Excess Capital Provides Opportunities

Our balance sheet at the end of the third quarter was strong. Our Tier 1 Capital Ratio was 11.7% and our tangible common equity to risk-weighted asset ratio was 8.7%. This strength underlines our capacity for growth.

Slide 9 – North American Regulatory Environment

With that overview of our bank’s current performance and the strategy driving it, I thought I would reflect on the impact of the regulatory environment on growth prospects for North American banks and what it all means for BMO.

It’s now been one year since Lehman Brothers failed and our whole financial system was threatened. Fortunately, the system proved resilient. While it will clearly take more time for the employment outlook to improve, there has been notable progress in a number of important economic indicators:

  • Capital markets have stabilized and spreads have narrowed;
  • The global financial institutions are in much better shape; capital positions have improved;
  • Consumers have moved from borrowing to saving; and
  • The housing market seems to have found a floor.

This reflects the normalization process I referenced earlier. However, there’s still a lot of work to be done to ensure this type of threat to our financial system does not re-occur and, appropriately, regulators have gone from reactive to proactive.

What made this threat so profound was the speed with which the crisis spread from company to company, reflecting a previously under-appreciated degree of inter-connection between markets. This is a major element of what we know as systemic risk. For those of you interested in the topic, a very credible framework was recently published by the Federal Reserve Bank of Cleveland, and provides a great starter piece for anyone interested in the likely direction of new regulation to address this risk.

Acknowledging that the U.S. government could have done more to prevent the worst financial crisis since the Great Depression, the administration is now leading the reform initiative, promoting:

  • Robust supervision and regulation of all financial firms;
  • Comprehensive supervision of financial markets;
  • Protection for consumers and investors from financial abuse;
  • New government tools to manage financial crises; and,
  • Greater international regulatory standards and cooperation.

From these objectives come numerous recommendations, and it’s becoming clear that reforms to reduce both the likelihood and consequences of business failures will embrace:

  • Many more companies, such as insurers, asset managers and hedge funds;
  • More products – including over-the-counter derivatives, particularly credit default swaps; and
  • More entities that support financial markets, such as exchanges, clearing houses and credit rating agencies.

In addition, more regulation will move to the federal level, including a potential overall super-regulator.

During the second quarter, 416 banks failed the FDIC’s grading system for asset quality, liquidity and earnings. This year just over 90 U.S. banks have been closed. This has been the fastest pace of closures in 17 years and the restructuring process is ramping up.

This signals potential opportunities for banks with strong balance sheets, good core business performance and a firm foothold in the U.S. market … like BMO Financial Group.

Slide 10 – Positioned for Success in the New Environment

To understand the implications for BMO’s long-term growth and success, it’s instructive to look at the recommendations from the U.S. Treasury which include:

  • Higher capital requirements for banks;
  • Higher quality capital, notably common equity;
  • More forward-looking capital requirements and accounting rules, so banks would hold more excess capital in good times, to be available in bad times;
  • Explicit liquidity standards for banks; and,
  • Better measurement of portfolio risks, the capital required to protect against them and constraints on banks’ use of leverage.

At BMO we endorse these measures, which in fact are entirely consistent with how we think about running our bank and reflect many of the elements present in the Canadian regulatory environment.

While I can’t tell you exactly what the final language and mechanisms of reform will look like, I can tell you how we’re approaching them. We see the changes not as ‘necessary regulation,’ but as ‘good business.’

A more robust regulatory environment enhances the stability and sustainability of our shared financial system. That is good for our customers and therefore good for us.

Slide 11 – Making Money Make Sense

It was a year ago that we introduced the notion of ‘Making Money Make Sense’ – the external statement of what we believe is a very compelling position for us in the market. BMO Financial Group is positioned to capitalize … with a brand promise that resonates particularly well with customers and we’ve made the operational changes necessary to deliver against it.

The gains we’ve made in our core businesses over the past 18 months reflect the fact that we have supported our customers and provided them with a differentiated experience. This doesn’t apply just to retail banking. It also includes our large corporate and institutional clients, for whom we provided essential capital and liquidity when needed during the financial crisis.

There is a huge amount of energy behind our brand promise – more than I can recall in the time I've been with the company. This is coming through in the customer feedback we receive – and as importantly in the feedback from employees – for whom advocacy is at an all time high. And most importantly, it's coming through in our core earnings.

If there was a point in time anyone wondered exactly what Bank of Montreal stood for – it just isn’t the case today. The changes we’ve made internally – both to our operations and our culture – now allow our 36,000 employees to personally play a part in delivering on the brand promise … which remains our highest priority.

Slide 12 – Committed to Our Customer Promise

There are literally dozens of initiatives supporting this promise. Here are a few examples:

First, we’ve taken a look at how we manage relationships with new customers to BMO – to ensure we have regular meaningful contact with them to win more of their business. We’ve made adjustments across the board – people and training, policies and the technology that supports them all;

Second, we’ve designed retirement planning services to help people plan for every aspect of retirement and prepare for these risks: longevity, inflation, market volatility. This strategy runs across all our retail wealth products;

And a third example, we’ve redesigned our entire retail and commercial lending process in the United States so that every step, every procedure, every document supports the brand and gets customers what they need.

While we are constantly asked about potential acquisitions in the United States, what is most important is that Harris is well positioned today to be a first call for new banking relationships. This bodes well for strong organic growth.

Some observers have predicted that the new regulatory environment could bring with it reduced margins and lower returns on equity for the industry. We think that view may be premature. We’re seeing that strong deposit growth and reduced non-bank competition is reversing margin erosion. In fact, we expect return on equity to increase.

Slide 13 – Key Takeaways and Looking Forward …

Before I invite your questions, I’d like to conclude with a few key messages.

First, BMO Financial Group has strong, well positioned core businesses that are generating very solid financial results. I can tell you that – while we’re pleased with our results and progress to date – we’re not yet satisfied. We can and will continue to improve.

Second, we’ve come through the economic downturn and financial crisis with a very strong capital position. We’ve dealt effectively with the related issues and didn’t allow them to serve as a distraction.

Third, our change agenda is focused on the customer and continues to be executed deliberately and systematically across all our businesses – and we're seeing the results.

Fourth, we continue to execute our expense management plan with no impact on the quality of the work we do for customers.

And fifth, BMO is ideally positioned to benefit from the new regulatory environment taking shape. Our primary focus throughout the recession was to stand by customers. This highlighted the shift in tone in the company and strengthened our reputation as a high quality financial partner.

Now – as we emerge from recession, we will see once-in-decades opportunity for growth.

I can tell you that today, at BMO, we have the platform, the capital, the customer orientation and the expertise to be a market leader.

Slide 14 – Q&A

Thank you for your attention. I’ll now be pleased to answer any questions that you may have.

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